Simplistically, insurance is the equitable transfer of risk associated with a potential loss from one entity to another in exchange for a premium. An entity, such as an individual or a corporation becomes the “insured” party when it transfers risk of loss associated with any tangible or intangible goods owned by the entity to an “insurer.” Generally, the assumption of risk by the insurer from the insured takes the form of a contract called an insurance policy. The insurance policy may set forth the goods ensured, the premium, the period coverage, the particular loss event covered, the amount of coverage, and any other suitable information. In accordance with the insurance policy, the insured may be indemnified against covered loss by the insurer.
An insurer typically makes a profit from a policy when the sum of earned premium and investment income generated by that premium exceeds the combination of underwriting expenses and any incurred loss. Underwriting of policies, which includes making determinations of premiums for the covered losses, is a complex and time consuming process. The complexity of underwriting, on a large part, stems from the difficulty associated with predicting the likelihood that a claim will be made against a policy. To this end, insurers use actuarial science to quantify the risks that they are willing to assume and the premium they will charge to assume them. Actuarial science uses statistics and probability to analyze the risks associated with the range of perils covered, and these scientific principles are used to determine an insurer's overall exposure.
While the actuarial models are sophisticated, the insurer's estimated premiums are often less than accurate due to a lack of precise input data about the insured objects. For example, when a home owner obtains insurance on his home and its content, the insurance company may determine the premium based on the sales price of the home and the home owner's claim of properties within. Without conducting detailed inspections, the insurance company is without actual acknowledge of the correct value of the properties as a whole. Also, the properties within the home may change over time, either increasing or decreasing the total home value. But such changes do not automatically trigger a re-evaluation of the insurance policy unless either the insured or the insurer takes an affirmative step to request it.
Additionally, changes to the home content may change the risks to which the home is exposed. As an example, an aged furnace or one that is no longer in compliance with building code may subject the home, as a whole, to greater fire loss risk. As another example, storage of flammable items in the portion of the house that is subject to heat (e.g., in the utility room) may significantly increase the fire lost risk of the home. Lack of knowledge concerning these variable conditions significantly affects the accuracy of the issuer's loss projection, which consequently affects the valuation of the insurance premium.
Similarly or more significant challenges exist in commercial policy valuations because commercial properties tend to undergo more frequent changes. As an example, a warehouse insurance policy may cover content loss within the warehouse at any given time. The warehouse content may include a changing combination of equipments, inventories, and a variety of other items. The value of the warehouse as a whole may vary significantly from one day to another. Moreover, risk of loss may vary even among similarly situated warehouses housing similar contents depending, for example, on the arrangement of the content.
In addition to the above, the lack of accuracy in the determination of the total insured amount may be a major concern for the insured. On the one hand, if the insured amount is evaluated to be too high in comparison to the actual value of the insured goods, the insured party may be forced to pay a much higher premium than it is necessary to cover the potential loss. On the other hand, if the insured amount is set too low, the insured party may be exposed to uninsured risks.
In view of the various concerns surrounding insurance policy valuation, it would be beneficial from the perspectives of both the insured and the insurer to obtain accurate knowledge of the value, condition, arrangement, and other information associated with the insured location and/or objects, especially when changes occur (e.g., a reduction in inventory, an addition of a dangerous substance, or any other change that would potentially affect the loss value). It would be further beneficial if such information may be automatically used to dynamically update the insurance policy valuation, including, for example, the insured amount and the insurance premium.